Answer to Question #80257 in Microeconomics for Diamond

Question

Suppose the U.S. Congress is considering passing an excise tax that would increase the price of a pack of cigarettes by $1.00. What would be the likely effect of this change on the demand and supply of cigarettes? Show this graphically.

Answer 1

If the U.S. Congress is considering passing an excise tax that would increase the price of a pack of cigarettes by $1.00, then the supply of cigarettes would increase, the equilibrium price would increase and the equilibrium quantity would decrease.